Understanding the Angel Tax for Startups in India: Current Regulations and Reliefs

The Angel Tax, a term often associated with startups in India, is a tax levied based on the difference between the fair market value (FMV) of shares issued by a start-up and the actual price at which they were issued. This provision is outlined under Section 562viib of the Income Tax Act. The tax is imposed to ensure transparency and to curb irregularities in the valuation of shares in start-ups.

The Basics of Angel Tax

Angel Tax is a form of income tax that affects unlisted startups in India. The tax comes into play when a privately-held company raises funds at a rate higher than its fair valuation, according to the government. The tax rate is set at 30%, which can be significant for startups that are quickly growing and issuing shares to investors. However, the tax is only applicable if the investment is made by a resident investor. Non-resident investors and venture capital funds are exempt from this tax.

Disputes and Controversies

The difficulty in determining the FMV of start-up shares often leads to disputes between startups and tax authorities. Several startups have faced harassment and demands for hefty taxes, which has generated a lot of controversy and criticism. As a result, the government has taken steps to address these issues and provide some relief to startups.

Exemptions and Measures for Startups

Several exemptions and measures have been announced to alleviate the burden on startups:

Eligibility Criteria for Exemptions

Start-ups with a turnover of less than Rs. 25 crores and incorporated as a private limited company. Investments made by domestic investors in companies approved by an inter-ministerial panel are exempt from Angel Tax. The paid-up capital and share premium of the startup should not exceed Rs. 10 crore after issuing shares. The startup should procure a certified fair market value and the investor should have a minimum net worth of Rs. 2 crores and an average income of at least Rs. 50 lakh over the last three financial years.

Easing Compliance and Simplified Valuation Norms

The government has introduced several measures to ease the compliance burden on startups, including:

Simplified Valuation Norms

The introduction of simplified valuation norms is designed to make the tax process more straightforward. This means that startups can rely on a compliant valuation process, which eases the compliance burden.

Easing the Compliance Process

Start-ups need to ensure they meet relevant regulations and criteria to be eligible for exemptions and benefits. The government has provided a simplified process to apply for exemptions, reducing the bureaucratic complications.

Government Measures for Relief

To further alleviate the burden, the government has introduced a structured approach:

Application Process and Timeline

The eligible startup can apply for an exemption from the Department of Industrial Policy Promotion (DIPP) with the required supporting documents. Upon approval, the application will be forwarded to the Central Board of Direct Taxes (CBDT) for final scrutiny. The CBDT is required to accept or reject the application within 45 days of receipt.

Conclusion

While Angel Tax is a necessary measure to ensure transparency in the valuation of shares in startups, its implementation has led to various controversies. The government’s recent measures aim to provide relief to startups, ensuring that the process of valuing shares and applying for exemptions is more straightforward and less burdensome.